Investing apps have become increasingly popular recently. These easy-to-use platforms are attracting millions, and, as a result, the number of digital investing apps has grown significantly.

While this level of investment activity is exciting in many ways, there are some concerns. Certainly, there are risks to investing, no matter what type of platform is used. But if you're thinking of using an app to invest, it's important to consider the potential drawbacks to using these tools specifically. The pitfalls discussed below are real and could result in financial losses.

Ignoring the Financial Big Picture

Typically, human, face-to-face financial advisors would likely recommend that you think more long-term with your investments, depending on your financial goals. Their financial planning advice typically includes things like paying down debt, buying more life insurance, building up an emergency fund, etc. Their investment management generally aligns with balancing the risk and return characteristics of different categories of stocks and bonds to build a diversified portfolio that is fine-tuned to align with your specific investment objectives, time frame and risk tolerance in order to build up your nest egg.

However, many investment apps essentially gamify investing, making it easy for investors to get in over their heads. They’re easy to navigate, but all those intuitive and colorful interfaces, push notifications and alerts can encourage investors to check back often. It can be a mistake for most long-term investors to check on their portfolios every day (or every hour). Too much looking makes many long-term investors too sensitive to short-term market moves that could nudge you to make quick, rash decisions—which isn’t always the strategy you want to take with investing.

Shortchanging Retirement Accounts

Generally speaking, there is a widely recommended order for how to invest your dollars, and tax-advantaged options like 401(k)s and individual retirement accounts (IRAs) usually come first.

Yet many investing apps usually only offer taxable brokerage accounts, potentially directing dollars away from the tax-free or tax-deferred growth of Traditional and Roth IRAs. These apps shouldn’t be used as a replacement for investing into retirement accounts. If they’re directing your money into a traditional brokerage account, it doesn’t have those tax advantages.

Granted, there are investing apps that offer access to IRAs, but then you need to decide if it makes sense to pay the extra fee to go through the app as opposed to going directly to the funds at brokerages that the apps use.

Misunderstanding the Risks

Although the apps typically use a questionnaire to identify an investor’s goals, time horizon and appetite for risk, they generally don’t have much follow-up to verify that the person really understood the questions and the risks involved. Some apps add additional risk with programs like those featuring branded names for margin trading or the ability to buy stocks on borrowed money. In this kind of trading, you can lose more than you deposited, so you want to be sure to do more research beyond an app’s disclosure and FAQ.

Dragging Down Portfolios with Fees

Some investing apps charge a monthly fee, which may be worth it for perks like a better interface and tools that help you save and contribute. But you should also consider the additional fees you might pay by going through apps that essentially act as middlemen.

For the index or ETF investor, the apps largely use the ETFs of well-known brokerages like Vanguard, Schwab, etc. so electing to use the app versus the brokerage could mean paying more for the same product. Going directly through a brokerage to invest in its funds instead of using an app may actually leave some extra money in your investments for future growth.

It’s important to compare the expense ratio you would be charged from an investment app with what it would cost to go directly through the brokerage to purchase an ETF or index fund. It might end up right around the same, but it’s always good to check.

And here’s another thing these firms don’t always mention: the short-term capital gains taxes you may be facing if you do a lot of trading.

Lack of Customer Service Access

There are advantages to investing via an established brokerage. One is the security blanket of customer service access. Have a problem? No worries. You can generally call and speak with someone. This is not always the case with investing apps, which may only offer email support.

Being able to talk through your options can provide a layer of comfort when making investing decisions. Granted, brokerages won’t be providing you with specific investing advice unless you pay an advisory fee, and in many cases, you need an asset minimum to unlock that offering. However, if you have a question like how to roll over your IRA or how to invest in a new ETF or index fund, you can call your brokerage for customer service help.

Selling Your Data

Several investment apps make money through a process called “payment for order flow” (PFOF). Under the PFOF model, brokerages and investment apps direct customers' trades through third-party services. The third party pays the brokerage or the investment app a fee in return for the chance to fulfill the orders.

Essentially, these apps are selling your order data to third parties for a profit. These third parties function as a midpoint between your app and the stock exchange, so they have great control over how much you'll pay for shares. PFOF is common among investment apps that charge $0 commissions or extremely low fees.

While the practice of payment for order flow is currently under scrutiny for creating potential conflicts of interest, it's important to note that this business practice doesn't compromise the security of your funds. Instead, it primarily dictates the price you'll pay for investment shares. It's ultimately up to you to decide whether or not you think this makes an app trustworthy.

Are Investment Apps Worth It?

Investing apps that streamline financial opportunities can be both exciting and intriguing. They have the potential to introduce a wide array of investors into the market. But at the same time, some caution must be used. As with any tool that’s tied to your money, they’re best approached carefully.

Smart investors understand that the purpose of investing isn’t to make quick profits but to put their money to work in a manner that aligns with their specific short- and long-term financial goals. If you’re concerned about saving enough for retirement, your children’s higher education, the purchase of a new home, or other financial objectives, you need to think like a strategic investor.

That’s why we recommend discussing your options with your financial advisor to see if using apps to invest a small pool of “fun money” to play the market is right for you.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Bret S. Kaye

Bret S. Kaye

Senior Vice President, Financial Advisor

CFP®, AIF®, Life & Health Insurance License A second generation financial advisor, Bret learned early in life the importance of balancing a budget, setting financial goals and managing risk through the lessons taught by his father around the breakfast table. Bret applies these lessons and values when working closely with clients to develop and implement detailed plans that, through deep, holistic planning and actionable advice, help clients reach their financial goals and...Read More